This Market Is In TERRIBLE Shape

Amber Hestla's picture

Friday, November 30, 2018 - 12:00am

by Amber Hestla

I hope you enjoyed time with family and friends over Thanksgiving.

For me, holidays always include time with my mother -- a woman who is fond of the saying "If you can't say something nice, don't say anything."

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So, in honor of her sage advice, I want to kick things off by saying something nice about the stock market -- it's likely we will have a lot of opportunities to make money buying put options for at least the next few months.

Now that I've made Mom proud, I'll say it less nicely. The stock market is in terrible shape. Here's what I'm looking at...

The 3 Bearish Signals We Saw Last Week
Here's the first chart I look at every day. It's a daily chart of the S&P 500 index, with a 200-day moving average (MA) applied (top panel) and Profit Amplifier Momentum (PAM) in the bottom panel. (I recently introduced this new system to my Profit Amplifier readers. To get the full details, you'll have to be a premium subscriber. But for now, just know that it's a reliable tool.)

Going into the weekend, the S&P 500 index failed to rally back to its 200-day moving average (MA), and Profit Amplifier Momentum (PAM) reached a new low. (More on this below the chart...)

Click here for larger image

I had expected bullish sentiment associated with the holiday to push prices up, which is what we often see around the holidays. But that didn't happen. In fact, the index saw a loss on three out of four days last week. Perhaps more importantly, the index closed below the open on all four days.

On a typical day, the market close accounts for at least 20% of the day's volume. This is the time of day when exchange-traded funds (ETFs) are forced to buy or sell to meet investor demand. This is also the time of day when hedge funds will sell if they are facing large losses. Moving lower into the close is a bearish signal.

Other Bearish Signs
Now, that's just one bearish signal. Unfortunately, there are a few other bearish signals on the chart.

The second signal is the 200-day MA, which is an important indicator for many traders. It's often used by large investors to decide whether to add new money to the market. With the index below that MA, large funds may decrease their buying, and that limits the upside of the market.

The third bearish signal comes from PAM, which is also bearish and reaching new lows. This indicates that selling pressure is increasing, a thesis consistent with news that investors are withdrawing money from hedge funds. That means hedge fund managers will be selling billions of dollars' worth of stock to meet redemptions.

I also expect hedge fund managers to sell heavily so that they can salvage a bonus. These managers are paid for performance and they are paid well when they beat the market. That means they can earn a bonus if they lose less than the S&P 500. So, if the index drops 10% and they report a loss of 1%, they can earn millions of dollars.

As long as stocks keep falling, these fund managers could beat the market by simply holding cash. With so much potential bonus money on the line, some managers will certainly be reducing their exposure to stocks. They could hold cash until the last trading day of the year, then buy a few stocks to make their annual reports look good. It's a tactic called "window dressing," and it actually happens, especially in December.

Technical Analysis Shows S&P 500 Moving To 2,491
PAM tells me that's what we should expect to see. I am looking for continued selling pressure into the end of the month. There will be up days, but overall, I believe the S&P 500 is moving toward a level around 2,491.

Click here for larger image

This price target is based on the small pattern formed over the past month. Chart patterns provide price targets based on the principle of symmetry, using the depth of the pattern to find the target. This might sound simplistic, but it works more than half the time and can be used to develop a trading strategy.

It's also interesting that this technique often results in a price target that coincides with a significant technical price level on longer-term chart. This is shown in the next chart, where the same price level is expected support based on where a rally stalled in August 2017.

Click here for larger image

Now, that price target finally gives me something nice to say about the stock market: Technical analysis is only projecting an initial drop of about 6% below current market prices around 2,655. It's just an initial price target, and the market could drop much lower than that.

Charts also provide a strategy for determining when the analysis is wrong. A move above 2,825 -- a gain of almost 6.4% -- would tell me stocks were moving higher. But that seems unlikely for now.

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Amber Hestla does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.